6 differences between VAT and US sales tax

Updated on June 1, 2022

Only the United States has a “sales and use tax” – a “turnover” tax – which is enforced in 170 countries. They both have a lot going on, but they’re completely distinct from each other. You’ll find information on the most significant differences, as well as tips on how to adhere to them both.

You may learn everything you need regarding US sales tax in this blog post, which is an excerpt from Avalara’s complete handbook for Europeans selling products in the US.

In order to test out Avalara’s US sales tax software, AvaTax, the company is offering a free 90-day trial. Learn how simple it is for you to automate your taxes and focus on your company’s growth instead.

What’s the same? 

On behalf of the federal government, businesses in the United States collect sales and value-added tax (VAT).

There are two scenarios where a non-resident or “remote” taxpayer is required if you are selling to local customers as a foreign supplier. In the United States, “nexus” refers to the location of a seller’s physical presence, which is referred to as a “tax nexus” in the European Union. Registration for sales tax or VAT will require the following steps once you have completed it:

 

Calculate and collect tax in a timely manner.

Report sales and taxes owed on a regular basis.

Taxes due should be sent to the relevant government agency.

But the parallels end there. However, the reasons for the complexity of VAT and sales tax differ. There are six key differences between this and the previous version.

1. Sales tax is state level, plus thousands of local jurisdictions; VAT is only levied at the country level. 

45 of the 50 US states, as well as the District of Columbia, impose a sales tax. However, this is where things get a little muddled with sales tax. It is not uncommon for additional taxes to be imposed by countries, cities, and more than a thousand other specific entities.

As a result, the business must identify which jurisdictions’ taxes apply and how to combine them in order to obtain the proper sales tax rate. Only the federal government has control over and levies VAT.

2. Huge diversity of sales tax rates, with frequent changes; Only three or fewer VAT rates. 

There is a wide range of tax rates due to the large number of tax jurisdictions in the United States, many of which overlap.

States, counties, and towns aren’t even making an effort to harmonise the prices they charge for similar goods and services. Finally, in the United States, states and tax jurisdictions routinely alter their sales tax rates – even monthly in Alabama.

This complicates calculations even further due to the possibility of shifting exchange rates. In most countries, there is a single standard VAT rate for most goods and services.

Basic food and public services are often discounted at two separate rates. In general, these don’t alter much from one year to the next.

3. Sales tax only on final consumer; VAT is collected on all transactions. 

When it comes to calculating sales tax, this is where things get a little easier. It is only billed to the final purchaser (at the till or online checkout).

As long as the seller has the official certificate from the firm or other body that is exempt, this can be reduced to zero. VAT is a lot more involved. For B2B and B2C sales, it is charged throughout the supply chain, including at each stage of delivery.

4. VAT is collected by the business; sales tax could be the marketplace’s obligation too. 

Even if products or services are offered through an online marketplace platform, the seller is still responsible for the calculation and collection of VAT. Most states in the United States now require marketplaces for remote sellers to collect sales tax.

When it comes to collecting taxes, there is a lot of variation across jurisdictions in terms of whether the platform is required to do so.

For the seller, keeping track of when a marketplace has withheld sales tax is critical in order to avoid double tax reporting and resulting financial harm.

It is legal for businesses to deduct the VAT that they have paid from the VAT that they subsequently charge to their own clients. Using the standard VAT return and VAT factional collection processes, this can be accomplished in order to reduce fraudulent activity.

As a result, worldwide sales where the VAT regulations and rates of different countries aren’t always obvious, become more difficult.

Digital services are subject to VAT, but may be excluded from US sales tax.

Digital or e-services are subject to VAT in Europe, as well as a rising number of other countries. Among them are:

Downloading or streaming media

E-books and publications; applications

Membership in online clubs; advertising

This includes online education and software as a service (SaaS).

Sales tax in the United States has been lagging behind these new products. ‘Digital goods,’ as they are known, are just now being taxed in about 30 states. Sales tax rates and laws in different countries are vastly different.

6. US consumer use tax is not to be forgotten 

State governments in the United States instituted a consumer use tax in order to collect taxes that were otherwise not being collected, such as those from remote vendors or from enterprises that consumed tax-free merchandise.

A customer who has not been charged sales tax by a remote business must submit a sales tax return and pay the tax to their state or tax authority.

It’s the same for enterprises that are reselling their own tax-free stock. Consumers are not subject to a similar need under VAT. However, there exist laws for self-supply of VAT reporting, but no tax cash payment is necessary.

We are proud to announce a partnership with Blue Link Worldwide, to provide specialist tax advisory support for their upcoming webinar series: ‘Doing Business in the USA’.

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